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EDP is trying to decide between two different conveyor belt systems

Finance Aug 10, 2020

EDP is trying to decide between two different conveyor belt systems. System A costs $438,000, has a six-year life, and requires $83,000 in pretax annual operating costs. System B costs $369,000, has a five-year life, and requires $92,000 in pretax annual operating costs. Both systems are to be depreciated straight-line to zero over their lives and will have a zero salvage value. Whichever system is chosen, it will not be replaced when it wears out. The tax rate is 23 percent and the discount rate is 14.2 percent. Which system should the firm choose and why?

Expert Solution

Since the NPV of the system B (-$553,040.90) has low negative than the system A (-$620,234.87). So the firm will choose system B.

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